If you can't win them, join them. That's the attitude of some U.S. companies facing fierce competition from Chinese suppliers. "I don't think any fine chemicals manufacturer in the U.S. can survive without a China strategy," says James G. Schleck, president and chief executive officer of JFC Technologies, a small fine chemicals company based in Bound Brook, N.J. The company is building a facility in the Ningbo Economic & Technical Development Zone in China's Zhejiang province. The facility will manufacture a nonpharmaceutical product that it used to make in the U.S. The move was necessary for the firm's and its customer's survival, he says.

"My customer told me that it could not continue getting supplies from us at the price that we were selling them," Schleck tells C&EN. "We had a long-term contract, and if I had held them to it, they would have gone out of business." Instead, the customer agreed to finance construction of a new plant in China, which it will own but which will be operated by JFC Technologies to make the product it had been supplying from the U.S.

Manufacturing in China is inexpensive. Labor costs are low and new equipment can be had at 25% of the cost of used equipment in the U.S., Schleck says. In addition, China has established manufacturing zones where effluent treatment is centralized and steam is delivered to the plant just like water and electricity. "There's nothing comparable to these zones in the U.S. They are designed to attract business such as ours," he adds.

At a ChemSpec news conference, Yongjiang Liu, a chemical engineer and the vice director of the Zhejiang Hangzhou Gulf Fine Chemical Zone, pitched the benefits of manufacturing in China. Speaking through a translator, he said that the zone, located in the city of Shangyu, in Hangzhou province, offers advantages in environmental treatment. Its central sewage treatment plant can treat 100,000 tons of sewage per day. Treated sewage is coursed to Hangzhou Gulf, where he claims it "can be easily absorbed by the turbid water and rolling waves." A solid waste treatment facility is planned.

Accessible by land, air, and water, the zone so far is only 12% occupied. Surrounding rivers supply abundant freshwater for cooling and washing. Drinking water comes from a reservoir with a capacity of 300 million m³, Liu said.

FOREIGN INVESTMENTS at present total $52 million, Liu said. Foreign investors are exempt from income tax for three years after the first year that they post a profit. And on the fourth and fifth years of profitability, they need to pay only half of the assessed income tax, he explained.

Synergetica, a Philadelphia-based supplier of intermediates for the agrochemical and pharmaceutical industries, did not have to build first in China to make its Chinese connection. Initially, says Lee DeWitt, Synergetica's vice president for business development, the company set up joint ventures with existing manufacturers in China, such as Xin Hua Pharmaceuticals and Qilu Pharmaceuticals. In three years, Synergetica made enough money to build its own plant, in Changzhou, about 100 miles northwest of Shanghai. The facility now manufactures 5 tons of pharmaceutical intermediate for a U.S. customer.

"With pharmaceutical companies looking for better and better deals, we are well positioned as a low-cost supplier," DeWitt says. Founded in 1999 by Chinese-born naturalized U.S. citizens, H. E. Michael Su and Albert Li, Synergetica adopted the China connection as its business plan from the get-go.

"We have a unique combination," DeWitt tells C&EN. "We are U.S. owned and managed. We know what big pharma expects in quality and service. But by manufacturing in China, we keep our costs low. Because of that, we are growing through the industry downturn."

Precursor Chemicals, a supplier of pharmaceutical intermediates based in Warminster, Pa., enjoys the same unique combination and reaps similar rewards. Because of the competition, "we have to cut costs wherever we can," Bo Zhou, the company's president, says. "One way is by developing new technology in the U.S. and implementing it in China. We will survive the competition. We're profitable."

Despite the lure of China, there is not yet a stampede to establish a foothold there. A major concern is protection of intellectual property.

"It's absolutely true that there is in China an elevated risk to intellectual property," Schleck says. "But I think the new generation of Chinese businesspeople recognize that to be considered long-term partners, they need to honor and be respectful of intellectual property. And I see that."

	VISIBLE Booths occupied by Chinese companies were hard to miss at ChemSpec. PHOTO BY MAUREEN ROUHI

Zhou agrees, saying, "Respect for intellectual property in China is getting better." As Chinese manufacturers increasingly deal directly with overseas customers, he explains, "they are getting a better and better sense of how to do business the Western way."

"We protect intellectual property by supplying information only on a need-to-know basis," DeWitt says. "The chemists will know the chemistry; the engineers will know the engineering, but nobody in China knows the big picture. Our customers, both big pharma and emerging pharma companies, are satisfied that their intellectual property is protected."

The effectiveness of the civil justice system in China is another cause for concern. "We take it for granted in the U.S. that if we enter into a contract there is an underlying understanding that the contract is enforceable," Schleck says. "I believe there's less faith in the system in China, because it is just being built."

On this point, Zhou says he has 90% confidence in China's civil justice system. His 10% uncertainty, he says, lies in the fact that "some companies may just close shop if you sue them."

The China factor bleeps strongly on the radar screens of U.S. and European makers of fine chemicals. As one observer puts it, "If your compound is something the Chinese can get at, you're in trouble." Many stay ahead by concentrating on complicated molecules and chemistries. But it could be just a matter of time before China eventually catches up in those areas as well.

COVER STORY

FINE CHEMICALS Midway through 2002, producers are cautiously optimistic about business, adopting different strategies to achieve growth POTPOURRI Shipping, Reorganizing, and Reopening SWEET SPOT Medium-Sized Producers Benefit From Size And Flexibility EVENTS HIGHLIGHT FINE CHEMICALS CHEMSPEC IN BASEL DRAWS GOOD CROWD New products, services, technologies, and corporate images were on display THE CHINA FACTOR Among small U.S. companies, establishing a China connection has great appeal ONE GOOD THING GIVES RISE TO ANOTHER Johns Hopkins chemists make optically active -lactams in linked functional columns

Chemical & Engineering News
Copyright © 2002 American Chemical Society